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Oudh Cocogem and Provision Stores Vs. Commissioner of Income-tax, U.P. - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtAllahabad High Court
Decided On
Case NumberIncome-tax Miscellaneous No. 718 of 1963
Reported in[1968]69ITR819(All)
AppellantOudh Cocogem and Provision Stores
RespondentCommissioner of Income-tax, U.P.
Excerpt:
- - it was clearly indicated in the deed that the firm would continue to carry on business in wines, etc. the deed of partnership need not fail in its entirety simply because the three brother proposed to sell wines in addition to provisions and medicines. that reasoning must fail, if it is held that the deed of partnership is partly valid, and a firm was constituted under the deed of partnership. ..the income-tax officer is satisfied that there is or was a firm in existence constituted as shown in the instrument of partnership and that the application has been properly made, he shall enter. ..in the present case the authorities were apparently satisfied that the application was properly made......with such an arrangement between a licensee and a third person. according to the plan under the deed of partnership, it was proposed that the firm as such should carry on the business in wines. the question remain whether the firm as such could carry on business in wines.in a.d. thiagaraja pillai v. commissioner of income-tax it was held by the madras high court that it cannot be taken as a matter of assumption or presumption that partnership firm for doing abkari business is illegal. that decision turned on the relevant excise rules prevalent in the state of madras. the position is not necessarily the same under the u.p. excise rules.annexure a to the statement of the case is a copy of the deed of partnership. in the introductory part of the document it was recited :'... who had been.....
Judgment:

V.G. OAK C.J. - The question of law referred to this court by the Income-tax Appellate Tribunal, Allahabad, is as follows :

'Whether, on the facts and in the circumstances of the case, the assessee-firm was entitled to registration under section 26A of the Act for the assessment year 1958-59 ?'

Messrs. Oudh Cocogem and Provision Stores, Lucknow, is the assessee. It is a firm carrying on business under an instrument of partnership dated October 10, 1940. Three brothers are partners of the firm. The assessment year is 1958-59. The firm was being registered for some time. On finding that there was no change in the constitution during the year under assessment, the Income-tax Officer granted renewal of registration for the relevant assessment year 1958-59. The Commissioner of Income-tax thought that renewal of registration was erroneous. Acting under section 33B of the Income-tax Act, 1922, he cancelled the registration. The assessee appealed. The appeal was dismissed by the Income-tax Appellate Tribunal, Allahabad. Upon an application by the assessee, the Tribunal has referred to the court the question of law quoted above.

The ground for cancellation of renewal of registration was this. The firm carries on business of selling wines. The licence for wine business stood in the name of one partner only. There was no licence in favour of the firm as such. For this reason, the Commissioner cancelled renewal of registration.

In Radhey Shiyam v. Mewa Lal there was an agreement between a licensee and a third person, in consideration of money contributed by the latter, for sharing the profits and losses in the business. It was held that the transaction does not amount to a transfer or sub-lease of the liquor contract contravening the provisions of rule 82 or section 23 of the Contract Act. In the present case we are not dealing with such an arrangement between a licensee and a third person. According to the plan under the deed of partnership, it was proposed that the firm as such should carry on the business in wines. The question remain whether the firm as such could carry on business in wines.

In A.D. Thiagaraja Pillai v. Commissioner of Income-tax it was held by the Madras High Court that it cannot be taken as a matter of assumption or presumption that partnership firm for doing abkari business is illegal. That decision turned on the relevant Excise Rules prevalent in the State of Madras. The position is not necessarily the same under the U.P. Excise Rules.

Annexure A to the statement of the case is a copy of the deed of partnership. In the introductory part of the document it was recited :

'... who had been carrying on a business under the name any style of Oudh Cocogem and Provision Stores, Hazratganj, Lucknow, since the year One Thousand Nine Hundred Thirty Four in partnership dealing in oilman stores, provisions, packed medicines, wines, etc.'

Later, it was mentioned under the articles of partnership that the partners would carry on business and continue the existing business with such additions and alteration as might be deemed fit from time to time. It was clearly indicated in the deed that the firm would continue to carry on business in wines, etc., as before.

We have examined the U.P. Excise Rules, which were in force in the year 1940. Rule 322 dealt with the transfer and sub-leases or licences. In sub-rule (2A) of rule 322 it was laid down that not more than two partners can be allowed to hold a shop under the auction system. In sub-rule (3) of rule 322 it was laid down that under the surcharge or fixed fee system, a licensee should not be allowed to enter into private partnership in the business covered by the licence. Rule 344 dealt with partnerships. Clause (c) of rule 344 laid down that in no case shall more than two persons be permitted to hold a licence jointly. On examining rules 322 and 344 of the U.P. Excise Rules, it becomes clear that it was not possible for three partners to obtain a joint licence for the sale of wines and liquors.

In Lalchand Mohan Lal Fazilka v. Commissioner of Income-tax it was held that a firm carrying on opium business under an opium contract taken in the names of some of the partners only is not a validly constituted firm under the provisions of the Opium Act, and is not entitled to registration under section 26A of the Income-tax Act.

In the present case, one of the three brothers held a licence in his name. Under the deed of partnership it was proposed that the firm as such should carry on business in the sale of wines, etc. We have seen that under the U.P. Excise Rules it was not possible to obtain a licence in the name of the firm consisting of three partners. That part of the deed of partnership is invalid.

The question now arises whether the mere fact that the partners planned to sell wines vitiated the entire deed of partnership. Section 23 of the Contract Act defines unlawful considerations and objects. The consideration or object of an agreement is unlawful if it is forbidden by law or is of such a nature that, if permitted, it would defeat the provisions of any law. In the present case the three partners planned to sell wines in the name of the firm. That plan was likely to defeat the provisions of U.P. Excise Rules. That object of the agreement was, therefore, unlawful. It is further mentioned in section 23 of the Contract Act that every agreement, of which the object or consideration is unlawful, is void.

Mr. Gopal Behari appearing for the department strongly relies upon section 24 of the Contract Act. Section 24 of the Contract Act states :

'24. If any part of a single considerations for one or more objects, or any one or any part of any one of several considerations for a single object, is unlawful, the agreement is void.'

Section 24 of the Contract Act deals with a situation where the consideration for an agreement is partly unlawful. Section 24 does not deal with a case where one of the objects for an agreement is unlawful. The Contract Act has drawn a distinction between the consideration of an agreement and the object of an agreement.

Mr. Srivastava appearing for the assessee relies upon section 57 of the Contract Act. Section 57 of the Contract Act states :

'57. Where persons reciprocally promise, firstly, to do certain things which are legal, and, secondly, under specified circumstances to do certain other things which are illegal, the first set of promises is a contract, but the second is a void agreement.'

In Russell v. Amalgamated Society of Carpenters and Joiners the rules of a society registered under the Trade Union Acts of 1871 and 1876 combined provisions for the miliant purposes of a trade union, which were admittedly in restraint of trade, with provisions for the provident purposes of a friendly society. It was held by the house of Lords that the society was an illegal association at common law inasmuch as its main purposes were in unreasonable restraint of trade, and the rules relating to those purposes were not severable from the rules relating to its provident purposes.

In Swaine v. Wilson the general objects of a society were legal. It was held that the fact that some of its rules are illegal as being in restraint of trade does not constitute the society an illegal society.

In Pickering v. Ilfracombe Railway Company it was observed on page 250 that the general rule is that where you cannot sever illegal from the legal part of covenant, the contract is altogether void; but where you can sever them, whether the illegality be created by statute or by common law, you may reject the bad part and retain the good.

Section 41 of the Indian Partnership Act deals with dissolution of firms. A firm is dissolved under certain circumstances. The proviso to section 41 of the Partnership Act states :

'Provided that, where more than one separate adventure or undertaking is carried on by the firm, the illegality of one or more shall not of itself cause the dissolution of the firm in respect of its lawful adventures and undertakings.'

Somewhat similar considerations arise when a number of persons enter into partnership for carrying on activities one of which is unlawful. Annexures 'D' and 'E' to the statement of the case are copies of account sheets of the firm for the relevant year. Annexure 'D' shows that the profit for the year from the wine department amounted to Rs. 7,956.40. Annexure 'E' shows that the profit of the firm from the stores department for the same year amounted to Rs. 13,101.72 Annexures 'D' and 'E' indicate that the firm has been keeping separate accounts for the stores department and wine department and the profit of the firm from the stores department considerably exceeded the profit of the firm from the wine department.

We have quoted the obejcts of the deed of partnership. The three brothers planned to do business in stores, provisions, medicines and wines. It so turned out that the plan to sell wines in the name of the firm was unlawful. That need not prevent the firm from carrying on business in stores, provisions and packed medicines. Applying the test of severability, it is possible to separate the object of selling wines from the object of selling stores, provisions and medicines. The deed of partnership need not fail in its entirety simply because the three brother proposed to sell wines in addition to provisions and medicines. the deed of partnership is not void. The deed is valid in so far as the partners proposed to sell stores, provisions and packed medicines.

Lastly, Mr. Gopal Behari Faintly suggested that registration or its renewal is merely a privilege, and not a right. This question hardly arises out of the question of law referred to the court by the Tribunal. The Tribunal upheld the cancellation of renewal of registration simply on the ground that the deed of partnership is void, and no firm came into existence. That reasoning must fail, if it is held that the deed of partnership is partly valid, and a firm was constituted under the deed of partnership.

Section 26A of the Indian Income-tax Act, 1922 laid down the procedure for registration of firms. Sub-section (2) of section 26A laid down that an application for registration shall be dealt with by the Income-tax Officer in such manner as may be prescribed. Rule 4 of the Income-tax Rule, 1922, contained the procedure for registration of firms. Sub-rule (1) of rule 4 ran thus :

'If... the Income-tax Officer is satisfied that there is or was a firm in existence constituted as shown in the instrument of partnership and that the application has been properly made, he shall enter... a certificate....'

In the present case the authorities were apparently satisfied that the application was properly made. We have found that the deed of partership is partly valid and a firm is in existence constituted under that deed of partnership. Under these circumstances, the assessee was entitled to registration. The assessee took up the position that the deed of partnership is valid in its entirety. That stand is not correct. The deed of partnership is partly invalid. Under the circumstances, parties may be left to bear their own costs in this reference.

Our answer to be question referred to the court is in the affirmative. We make no order as to cost in this reference.

Question answered in the affirmative.


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